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How do I decide which type of mortgage is right for me?

Mortgage rates

.If you are new to the property market, then finding a mortgage can be incredibly daunting. Not only must you decide how much you need and which provider to approach but you’ll be faced with the decision over which type of mortgage to choose.

Choosing the right type of mortgage is important – getting it wrong could be an expensive mistake. The type of mortgage you choose will depend on your circumstances.  Narrowing it down can then help you to select the right product for your needs and your budget.

Repayment vs interest-only mortgage

When you pay off both the interest and the capital every month, this is known as a repayment mortgage. In the majority of circumstances, a repayment mortgage is likely to be the most appropriate choice. This type of mortgage guarantees that you are paying off the entire debt, ensuring that your mortgage will be cleared by the end of its term.

These days, there aren’t a lot of interest-only mortgages around. An interest-only mortgage is so called because you are only repaying the interest each month, and then the capital is paid off at the end of the term. This type of mortgage was popular in the past when homeowners used investments to pay off the outstanding lump sum. However, they became known as a ‘ticking time bomb’ because the investments often weren’t enough to pay off the mortgage. Homeowners were then saddled with debt at a time when they should be thinking of a mortgage-free retirement.

Fixed rate vs variable rate mortgage

A fixed rate mortgage will give you fixed payments for a set number of years. From then on it will revert to the lender’s standard variable rate (SVR).

Choosing a fixed rate mortgage will give you a certain amount of security, knowing what your repayments will be over a set period. This will also protect you from any increase in interest rates made by the Bank of England during your fixed-term. However this could also trap you if the interest rates fell as you wouldn’t be able to take advantage of the lower rates.

Standard variable rates tend to be the worst value mortgages on the market. Rates are set by the lenders and they are usually much higher than any of the other fixed or discounted rate mortgages that are available.

Many homeowners are on a SVR because they have come to the end of their fixed term or discounted period. It’s always wise to keep track of when your mortgage term is due for renewal so you can try and find a better remortgage deal than the SVR.

What is a tracker mortgage?

A tracker mortgage follows the path of the Bank of England base rate. For example your mortgage may be base rate plus 2%. In the current climate, your tracker rate would be 2.75%. If the Bank of England raised their interest rates to 1%, then your mortgage would increase to 3%. If the base rate dropped to 0.5% again, your tracker mortgage would go down to 2.5%.

This type of mortgage is transparent – if the base rate changes then so will your repayments. However it is more unpredictable than a fixed-rate mortgage. If you are worried about affordability then you may want to steer clear of this type of mortgage.

How do I find the best type of mortgage for me?

If you’re struggling to choose the right type of mortgage then talk to a mortgage broker. They can talk to you about your personal circumstances and help you to choose the type of mortgage that will suit your needs. Whole-of-market mortgage brokers have access to hundreds of products, including deals that aren’t available on the high street. Once you’ve decided on the type of mortgage you should go for, they can narrow it down to the lender and product so you can progress with your application.

Speak to an adviser at So Smart Money to help you find the right mortgage.

The above post does not constitute advice – financial, legal or otherwise. The information within this article is the author’s own opinion and do not necessarily reflect the views of SO Media or So Smart Money.


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